What is a Broker-Dealer? - Davis Polk & Wardwell

What Is a Broker-Dealer? § 1A:2.6
customers to the broker-dealer. 88 These activities may be deemed
broker-dealer activities under certain circumstances.
Prior to the adoption of the Gramm-Leach-Bliley Act (GLBA), 89
banks 90 were excluded altogether from the definitions of “broker” and
“dealer” under the Exchange Act. 91 The GLBA replaced this exclusion
with eleven conditional exemptions for banks from the statutory
definition of “broker,” 92 including an exemption for banks’ “networking”
arrangements. 93
88. Regulation R Adopting Release, supra note 87.
89. Also known as the Financial Modernization Act of 1999, Pub. L. No.
106-102, 113 Stat. 1338 (1999).
90. A “bank” is defined in section 3(a)(6) of the Exchange Act to include: (A) a
banking institution organized under the laws of the United States, or a
Federal savings association, as defined in section 2(5) of the Home Owners’
Loan Act [12 U.S.C.S. § 1462(5)], (B) a member bank of the Federal
Reserve System, (C) any other banking institution, whether incorporated
or not, doing business under the laws of any State or of the United States, a
substantial portion of the business of which consists of receiving deposits
or exercising fiduciary powers similar to those permitted to national
banks under the authority of the Comptroller of the currency pursuant
to section 92a of Title 12, and which is supervised and examined by State
or Federal authority having supervision over banks, and which is not
operated for the purpose of evading the provisions of this title, and (D) a
receiver, conservator, or other liquidating agent of any institution or firm
included in clauses (A), (B), or (C) of this paragraph. “Bank” has been
interpreted to include the U.S. branches and agencies of foreign banks to
the extent that they are supervised and examined by a federal or state
banking authority. See SEC Release No. 34-27017, n.16 (July 18, 1989).
It is important to note that exceptions applicable to banks under the
Exchange Act, as amended by the GLBA, are not applicable to other
entities, including bank subsidiaries and affiliates, that are not themselves
banks. At the same time, the SEC has provided no-action relief to a service
corporation that proposed to enter into networking arrangements with
broker-dealers where the establishment of the service corporations was
required by the laws or regulations governing the financial institution. See
SEC Letter to Christine A. Bruenn, the State of Maine (Apr. 9, 2002); SEC
Guide to Broker-Dealer Registration, supra note 72.
91. Before adoption of the GLBA, Exchange Act § 3(a)(4) defined the term
“broker” as “any person engaged in the business of effecting transactions in
securities for the account of others, but does not include a bank.” Before
the GLBA, Exchange Act § 3(a)(5) defined the term “dealer” as “any person
engaged in the business of buying and selling securities for his own
account, through a broker or otherwise, but does not include a bank. . . .”
92. See Exchange Act §§ 3(a)(4) and 3(a)(5). For a more detailed discussion on
the GLBA and exemptions for banks under the Exchange Act as amended
by the GLBA, see infra section 1A:7.
93. See Exchange Act § 3(a)(4)(B)(i). While section 3(a)(4)(B)(i) only applies to
banks, the SEC has permitted certain other financial institutions, such as
(Broker-Dealer Reg., Rel. #9, 9/10)
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